Apple is the leader in so many segments of the technology world. With the surge in online shopping and mobile payments for merchandise and services, companies such as PayPal have been able to lead the way in profiting off the fees that accompany those billions of transactions. Not to be left out of the action, Apple Pay was launched last year to compete with PayPal and others, but has been met with lackluster interest and users have been slow to come on board.
So as one would expect, Apple is responding with a business strategy that the company hopes to greatly increase the overall adoption of Apple Pay, by tapping into the unprofitable business of person-to-person payment services that are increasingly being used by consumers to reimburse friends for dinner and movie tickets with the click of an app. While these transactions are not generally profitable because they charge little or no transaction fees, there is still money to be made and the leaders in that market, PayPal and Venmo confirm that those users are some of their most engaged customers, spending more money with them overall. So to get a piece of the action, Apple not only plans to offer person-to-person transactions, but to do it for FREE. Although Apple will lose money on each transaction, by adding the ability for owners of newer iPhone models to send each other money could double the usage of Apple Pay by those users in as little as 18 to 24 months, and could “short-circuit the existing players,” according to Richard Crone, Chief Executive Officer at Crone Consulting.
Apple’s business strategy is a great example of the use of penetration pricing to penetrate the surging market of online payments and the related transaction fees, and gain a critical mass of customers for Apple Pay. Once Apple has gained those customers by offering the service for free, it is banking on those same customers using Apple Pay in stores, which is a real moneymaker as they charge bank fees each time customers tap their phones to pay. It’s a smart strategy to lure customers away from the competitors, and after their first year of lackluster results with Apple Pay, it’s certainly a strategy that they estimate will be well worth the costs.
Kharif, Olga (2015) Why Apple Wants to Get Into the Unprofitable World of Payments Between Friends, Bloomberg Business, December 1, 2015.